Green Dot Corp (GDOT) 2012 Q2 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Green Dot Corporation second-quarter 2012 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. The contents of this call are being recorded. I would now like to turn the conference over to Mr. Christopher Mammone, Vice President of Investor Relations for Green Dot. Please go ahead, sir.

Thank you and good afternoon. On today's call Steve Streit, our Chairman and Chief Executive Officer, and John Keatley, our Chief Financial Officer, will discuss 2012 second-quarter performance and updated thoughts regarding our 2012 outlook. Following their remarks we will open the call for questions. The slides that accompany this call and webcast can be found at ir.greendot.com, and will remain available after the call. Additional operational statistics have been provided in a supplemental table within our press release. As a reminder today's call is being recorded and our comments include forward-looking statements, including statements about the loss of the TurboTax program to Green Dot and our expectations regarding future results. Please refer to the cautionary language in the earnings release and in Green Dot's filings with the Securities and Exchange Commission, including the 2011 Form 10-K that we filed on February 29, 2012 and our most recent Form 10-Q filed on May 10, 2012. For additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call we will make reference to financial measures that do not conform to Generally Accepted Accounting Principles. This information may be calculated differently than other companies similarly titled non-GAAP information. Reconciliations of these non-GAAP financial measures to the most comparable GAAP measures are included as supplemental tables in today's earnings release and are also available at ir.greendot.com.

All statements made by Green Dot officers on this call are the property of the Green Dot Corporation and subject to copyright protection. Other than the replay noted in the press release, Green Dot has not authorized and disclaims responsibility for any recording, replay, or distribution of any transcription of this call. Now, before I hand it over to Steve, just a couple guidelines for today's Q&A session. In an effort to get to everyone in queue we ask that you limit yourself to one question and one follow-up. And then queue back in for any additional questions. Now I'd like to turn the call over to Steve Streit.

Thank you Chris. Welcome everyone to our Q2 earnings call. As always, with me this afternoon is Green Dot's Chief Financial Officer, John Keatley. After my remarks John will recap the financials for the quarter and will also provide greater detail around our 2012 financial outlook, which we are updating for you all today. Lots of things to discuss and let's get started. We had a good quarter of growth in the core business with non-GAAP revenue up 23% year-over-year, less the TurboTax impact, and non-GAAP earnings-per-share was up $0.35. Our non-GAAP EPS reflects a $0.01 reduction for a one-time write-off related to IT development for a large partnership that we learned last month will be delayed for the foreseeable future, so we took the write off now.

Other highlights for the quarter, excluding the impact of the discontinued TurboTax program new card activations were up 18% year-over-year in the quarter and GVD was ahead by 24%. Active cards grew to 4.4 million as of June 30, representing year-over-year growth of 16% excluding the discontinued tax program. John will discuss our Q2 results with a bit more granularity here in just a few minutes. Next I'd like to let you know that we are going to use the occasion of this earnings call to provide revised guidance for the remainder of this year. We see a greater level of uncertainty going forward in our business as our market and the prepaid industry in general continues to evolve. So we feel the need to be cautious and lower guidance for the remainder of the year, and I would like to walk you through our thinking.

There are a number of unknowns in our business that could be headwinds to revenue growth going forward in these potential headwinds fall into two main buckets. Bucket one is new competition. After personally meeting with most of our largest retail partners over the past 90 days, we expect that several new competitive products could be on sale next to Green Dot products at many of our current retail distribution locations later this year or next year. Some of our retailers believe that expanding the in store product selection will increase the overall pie and invite new customers into the category and that this may benefit Green Dot with higher sales. But other of our retailers believe the category may will grow but that Green Dot's net unit sales may decline as a result. Frankly, we don't know how this will all play out, and therefore we think it's most appropriate to take a conservative view and assume that, at least at the outset, that we lose some portion of our unit sales at most of our major retailers.

The second bucket is around new risk controls which we voluntarily began to put into place in late Q1 and then accelerated into Q2. These new controls are designed to enhance security measures through tighter customer identification protocols and more sophisticated back end monitoring of accounts. While these new risk controls are without question the right thing to do, the short-term effect is that we are seeing our year-over-year growth in new accounts activated be negatively impacted as new customer accounts are now more stringently vetted as part of these new processes. The updated growth ranges that John will share with you in a minute reflect our best attempt to bake in a conservative view on how these might play out for the remainder of the year.

We also want to use this call to share some very good use with you on a number of fronts. First, our previously discussed strategy to enter new channels and develop new products for new segments is beginning to take shape quite nicely. In particular, we have recently had some very big wins in our revenue division that could potentially provide meaningful tailwinds beginning in 2013 and continuing over time. First, I am pleased to announce that we have signed a long-term exclusive partnership with a leading provider of financial services for the higher education channel, including student loan disbursements. We cannot disclose the name of the partner right now for competitive reasons, but we will before we launch the products. The partnership calls for Green Dot Bank to service issuer and Green Dot Corporation to service program manager to provide accounts to students for refund disbursements and for their general banking needs.

We think that Green Dot is well positioned to succeed in the higher education channel because we intend to offer a feature-rich product with fees that are at the lowest end of the market, along with our Company policy of never having any type of overdraft or penalty fees ever. Given the nature of distribution partnership of this partnership, combined with Green Dot's pro consumer products, we believe that Green Dot has a good opportunity to become a leading provider of these types of student accounts over time. Next, I am pleased to announce that Green Dot recently entered a multi-year agreement with UniRush LLC for Green Dot Bank to be the exclusive issuer of the retail version of the RushCard Prepaid Visa card, and for Green Dot Corporation to co-manage the portfolio with UniRush. Prior to this deal, the RushCard was only available online and over the phone through the RushCard website and service centers where the UniRush Company has made a good deal of a business success over the past eight years or so in building one of the largest and most successful prepaid card programs. We believe that joining forces with UniRush and distributing the RushCard at retail will be helpful in expanding our overall category sales by providing our retailers with a differentiated and targeted a product that appeals to consumers who relate to Russell Simmons and the brands he has created. The RushCard will be a key component of our new segmented Category of the Stars retail concept that I'll tell you more about in a second, and so we welcome this partnership with Russell Simmons and his great team.

Next I'd like to share with his more details about Category of the Stars which has a goal of expanding gross unit sales by offering new products for new segments of potential prepay customers. We began marketing this new concept to all of our major retail distribution partners starting three or four months ago and the response has been very positive. Category of the Stars is an exclusive retail merchandising solution geared towards those retails who are looking to expand their overall prepared sales with more product on the rack intended to attract new incremental buyers to the category. Green Dot's Category of the Stars includes our Green Dot Visa, the nation's number one selling mass-market brand, AARP MasterCard, the most trusted recognized name amongst older Americans. The NASCAR Visa card, targeted at NASCAR fans looking for a product that reflects their affinity for this massive lifestyle sport, and the RushCard, the prepaid card we just told you about, co-owned and marketed by Russell Simmons. All of these products are retail brands where Green Dot is the exclusive provider. We expect that many of our major retailers will install the Category of the Stars concept over the next 12 months leading to greater sell through per J-hook and higher overall organic same-store sales.

Finally we're pleased to announce that we are seeing some of the fruits of our Loopt acquisition with the technology beta release this week of our new mobile-centric checking account product. All of our technology employees at our facilities here Monrovia, and in Silicon Valley, worked hard on this major initiative, and we are very excited to begin the first phase of testing with friends and family. Based on the learnings acquired in this test phase, we will continue to make changes and modifications and prepare for a broader beta rollout in Q4 followed by increasingly broader rollouts in the following months. As a reminder, this is a very modern, engaging and mass appeal checking account, that is targeted to the other 99% if you will, who are looking for a better checking account. We have demoed this product with most of our major retailers and other prospective new distribution partners, and the response to the product, and the desire to sell the product, has been very strong.

In addition to our retail channel, we believe this new checking account product has the potential to be transformative to our business in other channels like the education and online channels, because the usage and retention characteristics we believe will be more akin to a checking account than a prepaid card. So, lots of work and discovery still to go, but we're very pleased with our progress, and I wish to publicly thank and congratulate our incredible banking led by Lew Goodwin, and our fabulous technology team led by our COO, Will Sowell, for their outstanding efforts. Lots of positive and exciting developments with all this, but the ultimate impact on our business is still unknown because these are all new and unproven initiatives and so we haven't modeled any revenue from any of these initiatives into any forecast. We believe its fair to say that any one or all of these new opportunities could have the potential to create some material upward performance for our business beginning in 2013. We will keep an eye out and keep you posted going forward.

Lastly, during my portion of the call today I want to bring up-to-date on some on some previously discussed initiatives. And that is first, our processing team led by Ralph Calvano continues to staff up and do great work and make good progress on the development of our new internal processing platform. And we continue to be on track with the expected timeline given previously on this initiative. Next, Green Dot Bank continues its successful conversion of accounts off of Synovus Bank. We are also pleased to let you know that starting in June, we began issuing our first Green Dot branded cards from our own Green Dot Bank. Hereto, we remain on track with the time line previously given on this initiative.

Finally, I am pleased to announce that we have named Sam Altman to the position of Chief Technology Officer for Green Dot Corporation. Sam was the founder and CEO of Loopt, which as you know, was the Silicon Valley technology company we acquired earlier this year. Sam is a real technology visionary. He's an amazing guy and a fabulous technologist, and we're all pleased to have him more and more involved with our technology transformation at Green Dot. Concurrently, I want to let you know that both our previous CTO, Mike Strange, and our CIO, John MacIlwaine have exited the Company to pursue other opportunities and we certainly wish them will. Now I'll hand the call over to John Keatley with more color our Q2 financial performance, and he'll also have updated thoughts on our 2012 guidance, and then after John's remarks we will begin the Q&A session. John?

Thanks Steve. As Steve mentioned, our Q2 performance remained solid, particularly when normalizing results for the discontinued tax program, which continued to impact the year-over-year growth of many of our key metrics. However, due to the factors that Steve outlined, we are revising our guidance for the remainder of the year and I'll share those details with you in a moment. The first topic that I would like to discuss is our revenue growth in Q2.

As you can see slide 3, our non-GAAP total operating revenues grew 17% year-over-year in Q2. Or 23% year-over-year excluding TurboTax. In terms of the three main categories of revenues, cash transfers grew the fastest, up 24% year-over-year, followed by interchange, up 19%, with card revenues ahead by 10%> Of the three revenue categories, card revenue growth was impacted most by the discontinued program. Normalizing for this loss, card revenue growth would've been 20%.

Slide 5 shows the main categories of operating expenses. Our sales and marketing costs increased more than 200 basis points as a percentage of total revenues. Primarily, the result of increased advertising and retailer promotions. One driver of the increase was expenses associated with the development of new creative for TV ads for both our Walmart MoneyCard product and Green Dot branded products, which will run through the remainder of the year. Comp and benefits were up 200 basis points as a percentage of our sales due to the addition of the Loopt team. Other G&A also came in higher year-over-year due to higher depreciation and amortization. The one-time write-off that we mentioned earlier, and expenses associated with our headquarters relocation.

As you can see on slide 6 our adjusted EBITDA decreased slightly year-over-year and margins were down. We estimate that the previously mentioned one-time write-off of program development equates to about 50 basis points of margin, so if you normalize results for that write off, EBITDA was about 1% year-over-year and margins were off by roughly 3 percentage points. Our non-GAAP net income, which is shown on slide 7, was $15.3 million. Down slightly compared to the same quarter last year. Non-GAAP EPS came in at $0.35 or $0.36 if you add back the one-time write off. In terms of our key operating metrics, we showed strong year-over-year growth especially when the numbers are adjusted for the discontinued tax program.

For the purposes of comparability, all of the following metrics have a normalized by excluding TurboTax. Our active card portfolio grew 16% year-over-year and new card activations increased 18% year-over-year. We saw a modest increase in card revenues per active card driven by higher average card usage. Our GDV grew 24% year-over-year and the volume of direct deposit funds loaded to cards increased 30% year-over-year. Most of the growth came from increased payroll and government benefit direct deposits. This is a positive trend for us as these sources of direct deposit tend to be recurring in nature and correlated with higher lifetime revenue.

Cash transfers continued to grow rapidly in Q2, increasing 22% year-over-year. Driven by both increased reloads from our portfolio of cardholders and more reloads from our network partners' portfolio. Portion of cash transfer revenue from third-party reloads increased to 23% during the quarter versus 17% in the year ago period. Our Walmart revenue concentration declined slightly to 62% of non-GAAP total operating revenues during Q2 versus 64% in Q1.

Our balance sheet continues to be very strong. We ended the quarter with $275 million of total cash and investment securities, including $121 million of unrestricted cash and cash equivalents. $141 million of investment securities, $13 million of restricted cash, and no debt. We continue to look for opportunities to deploy this cash to create value for our investors. We are seeing some pullback I'm valuation expectations from private companies in our sector and related industries and believe that we may soon find some good opportunities for accretive acquisitions.

I'd like to talk more about our revised expectations for the full year. And to provide some more color on the various assumptions underlying those expectations. For 2012, we now expect non-GAAP total operating revenues to grow between 10% to 12% versus the prior range of 20% to 24%. The slower top line growth reduces our expected range for adjusted EBITDA to $104 million to $106 million versus the prior $133 million to $138 million and brings our non-GAAP EPS guidance down to $1.29 to $1.32 versus the prior $1.65 to $1.70 per share for the full year. With respect to our key operating metrics for the full-year, we now expect growth in average active cards of approximately 5% and cash transfer growth in excess of 15%. Due to the volatility of the growth of our GDV, and the inconsistency of its correlation with interchange revenue, we will no longer be providing guidance on GDV growth. Although we will continue to report GDV on a quarterly basis so that you can track this metric. However, starting with this quarter and going forward, we will share total purchase volume with you, as this metric has proved to be somewhat more predictable and is more closely correlated with interchange revenues.

Earlier in the call Steve walked through the main assumptions behind our updated outlook. Now I'd like to take the time to discuss the rationale behind the revised guidance. First, as we previously announced, we have made efforts to strengthen our risk policies and controls to ensure a high-quality and more sustainable business. While these controls have improved the security and quality of our portfolio, they have also impacted the approval rates of customers attempting to activate a new card or attempting to use their card once activated. Taking the combined effect of these various new controls, we estimate that the growth impact to our overall portfolio has been on the order of 5 to 10 percentage points.

Second, as Steve mentioned, we recently learned that more of our retailers will begin selling competitive GPR products in addition to our products, in some cases beginning in late 2012. In our history we have had only two retailers grew from an exclusive merchandising display to a non exclusive display with multiple products. In both cases results have been that our sales growth decreased year-over-year, but our gross number of active cards from those retailers, and the revenue derived from those retailers, has continued to grow. Plus, each retailer had different circumstances where pricing of the competitive products, or merchandising prominence for Green Dot products changed at the same time. There were a lot of moving pieces. We don't feel like we have enough data or historical experience to accurately predict what will happen to our volumes at other retailers that move to a non exclusive format. Given this uncertainty, we have taken what we believe to be a conservative view of how sales might be negatively impacted and you see that view reflected in our re-forecast.

Before I conclude my prepared remarks I wanted to offer some high level comments on 2013. As you'll notice, our top line growth in the first half of 2012 was 17%, and our re- forecast implies top line growth in the second half of 2012 to be in the mid to high single digits. Although we are not yet ready to provide guidance for 2013, as you adjust your models for next year, assuming these trends persist and are not offset I by new revenues from the initiatives Steve discussed earlier, our growth in 2013 could more closely resemble our growth in the second half of 2012 than the growth we saw in the first half of 2012. This concludes our prepared remarks. At this point we're ready to take your questions. Operator?

Thank you sir. We will now begin the question-and-answer session.

(Operator Instructions)

Bryan Keane, Deutsche Bank.

Hi. Maybe you can help me a little bit with the EBITDA margins. I think now you're guiding for them to be down for the year over 500 basis points. And the controls and the competition, I think you started to give us some details on that, but I'm a little surprised at the magnitude of the downward revision on the EBITDA margins. Maybe you can just help us through it. Thanks.

Sure. We had several expenses this year that we talked about earlier. We're rolling out our new bank, building out our new processing platform, and those initiatives don't really moderate or adjust with revenues. They're not variable expenses. So, with the guide down on revenues, a lot of that lost revenue flows more or less directly to margin, and disproportionately impacts our margin for the year.

Okay, and let me just ask Steve a tough question. Obviously, these are disappointing results. And guidance. Have you given any thought about bringing in a payment operator to run the Company as maybe a CEO, and maybe moving up to a more of a Chairman type role?

That's a good question to ask and we actually look at all kinds of things all the time because we're pretty good at self evaluation. And we tend to be fairly conservative operators, which is why we're giving such an early warning to what could happen next year with other products on the shelf. A fair question and one for the Board, I will ask them to get back to. But it's not something we talk about every day, but I've always been very open as our Board is, and all of us, especially being a senior shareholder that my interest in the Company is not only running it, but more importantly, in the investment that I, and you, and everybody else may have in it.

Okay, thanks.

Julio Quinteros, Goldman Sachs.

Hi, it's Roman Leal, here for Julio. Maybe if you help us think a little bit through the reforecast, and understand that there's not a lot of historical case studies to base -- or to draw conclusions from on the potential impact to your sales, but what do you -- what is implied in your forecast? Are you just taking basically 10%, 20%, 30% decrease to your previous sales forecast in those retailers? Help us walk through the thought process there.

Yes. We mentioned there are two main factors driving the re- forecast. One is the impact of our new risk policies and controls, and we said that we have seen an impact somewhere in the range of 5% to 10% to our active portfolio from those new controls. And then we mentioned the new competition at retail. We've got a better read on the risk policies and controls, if that is something that is impacting our results today. Whereas, the impact of new competition is more forward-looking and it's based on the information we have that we mentioned is limited.

So if you think of the guide down being from the midpoint, being from 22% revenue growth, to now the midpoint is 11%, you've got about 11% guide down. If you can think of roughly half of that coming from the risk policies and controls and roughly half from the new competition, as far as how we've modeled the new competition, again this is the one that is more challenging because we have a limited history. But in the handful of retailers where we have seen new competition in the past, we have seen our new card sales take a significant hit, but our new active cards, I'm sorry, our active cards continue to grow, but at a much slower rate. So we used that to inform our model and we came up with some high and low case scenarios and then we basically went with one of our lower or lowest case scenarios to build our guidance upon.

Lowest case meaning the most severe. Because we just don't know, and that's the key.

Okay. And the commentary on the first half of 2013, is that just the nature of taking the retailers who are going to move to non-exclusive retailers during the back half of this year and then annualizing that or do you expect additional retailers to move in that route in 2013?

Yes, we don't know exactly which ones will add competitive products, but one of the things we've learned over the last quarter is that more of them are considering it and considering it more seriously and near-term than we had thought in the past. So the 2013 reforecast reflects more of our retailers adding competitive products. And reflects the full-year impact of that hit to our active card growth over the year.

Okay, thank you.

Thanks Roman.

Jim Kissane, Credit Suisse.

John, just want to know, what part of your retail distribution today is exclusive and what are you assuming going into '13? What portion of your retail distribution will be exclusive?

The majority of our retail distribution today is -- .

That's a good question. We have some that are contractually exclusive and others that are not, but they just don't sell to anyone else. Let me also say, the majority of our sales come from retailers today where we are the only product on the shelf. And we assumed in this re-forecast that most of our retailers would be carrying competitive products going forward.

But does that include your largest distributor? Will they have multiple --

We are not saying anyone will or won't, because some of these contracts haven't been decided, and as we sit here today for this conference call we're in the middle of at least two different deal negotiations at two of our top five retailers. It's hard to say. In our forecast we have assumed that everybody would be doing something that could be injurious to our business and that's the nature of the forecast. It may well be that that doesn't happen are it may be that somebody, including our largest retailer, adds a product that may or may not complete. It's really hard for us to know, but in good conscience as I talk to our retailers over the past 90 days and met with them all, and said, gosh, you know what, we need to really think through this and come up with a scenario that if everybody sells four or five competing products, whatever it might be, what could happen? The output of that question is what we are guiding to? It doesn't mean it will be that severe. It doesn't mean that that might not happen, that everybody rises in sales, we just don't know. But with uncertainty should come caution and I think that's what you are seeing.

That's fair and then what's the nature of the competition? When you're sitting on the shelf? Is it coming from banks, is it national competitors? Is it smaller niche players? Who's the most --

You can take, there's only one really that -- where we have been exclusive and it went non exclusive in recent years. And that is at one of our largest convenience store outlets where the first two years, 2009, 2010, maybe the first two and a half years, we were the only brand on the shelf. And that retailer over the course of three or four months added four or five other brands beside us, so they added the Western Union product and the PayPal product, and others too. One-time use type product. And so there needs to be a fairly limited three-foot wide rack is now a six or seven-foot rack with four or five more products on the shelf beside us. And so that may be -- the other products by the way, are also at a lower price point than Green Dot, which is something that we may look at and adjust over time, but when I say price point, I mean the headline price, not the all-in price. Which is confusing to consumers at times but it's the way it works.

These are things we look at and say, this is representing the worst-case scenario because of the suddenness of being alone, to being now one of five or six different products at lower price points. Let's take that sales impact and see what if everyone did that. Having said that, we don't know that everybody will do that and many of the other retailers we are in have already indicated they're not going to go anywhere near that severe. It may be just one other product or two. But again in the absence of knowing, the thought was to wait any longer, given that this knowledge is fairly recent, in the last say 60 or 90 days, without assuming the worst and perhaps benefiting from the best, would just be imprudent and inappropriate, and so we decided to be as conservative and send up the early warning flare as soon as we could.

Thanks Steve, thanks John.

Sanjay Sakhrani, KBW.

Thanks, going to capital management. You guys talked about M&A --

Operator, I can't hear the question.

I'm sorry, can you hear me now?

They you go, yes, perfect.

Sorry about that. Just maybe on capital management you guys talked about M&A potentially, but with these weaker earnings, maybe weaker stock price, why not use some of the excess capital to buy back stock?

We look at use of capital all the time and the share buyback, especially after this kind of earnings call, could be something we look at, but the reality is that we look at the money and we say, what is the best use of the money for now and in the future? What is highly accretive today, but also can produce more benefits for tomorrow? And a share buyback may be one of those, but as John mentioned, ironically, in large part due to our own stock's performance over the past year and half, that the valuation for any number of entities in and around the payment space, or card space, or prepaid space or whatever you want to call it has come down quite a bit. So having a good amount of cash on the books and being able to make acquisitions for cash, may in fact be far more accretive than the share buyback. So we're always looking at our capital position and then discussing what's the best use of that cash as opposed to how do we do a share buyback. And it may well be that at some point the share buyback is the winner in that question, but today is not.

Okay, and then just a follow-up, would you talk about the two of the top five retailers that you are talking to are you talking them into a contract period and they are looking for changes to the contract? Or were their contracts up for renewal?

Contracts renew at various intervals and so the conversations to put other products on the shelf are always part of that contract renewal process.

Okay, thanks.

Ramsey El-Assal, Jefferies.

Thanks for taking my call. In terms of the new risk controls, did regulators have any say in your decision to implement them? Was it related to the Florida investigation or the Consumer Finance Protection Bureau, or was it really at your own prerogative?

No, completely unrelated. Florida AG or CFPB inquiries have to do with the consumer affairs and consumer issues. As a bank, holding company and as a provider of these products we're always was reviewing our portfolio and the quality and the security of it. Which has more to do with compliance and security and fraud level. Not anything to do with consumerism. The consumers themselves wouldn't see the controls unless they were denied the card for some reason with their information. It has really to do with lessons we learned going back to the Intuit tax program we had a few years back, and the equipment and the systems we purchased to better protect ourselves from tax fraud. And as we employed the systems we realized that there were improvements that we could make company wide in both our customer identification procedures, and also our cash off procedures. That made the cards maybe more usable for a guy with bad intentions than not.

By limiting those kinds of controls, two things happen, one good, one not good. The good thing is the bad guy, to the extent there were any, said, okay, well this is not a usable product anymore, stop buying it. So that's good, it helps our Company long-term and it's part of what our obligations are and what is likely to be. The bad part of it is that you may be an otherwise perfectly good customer, but because we can't validate the information, or you answered a question incorrectly, or there's something about the pattern that you use the card, our system has ensnared you and denied you access to the card. In any system like that you're going to have some collateral damage. And what we do is overtime we sort of do the research on we adjust that dial left and right, and you try to get smarter with how you block and how you do your systems, but that's the nature of that.

Okay. In terms of the way you are thinking about this potential loss of exclusivity in some retailers, and this is related to some prior questions, are you assuming price cuts as a competitive response and that's going to impact your top line as well? Or is it really more about you're kind of comfortable with your pricing right now, it's really more about lost card sales?

We talked a lot about pricing.

Sure, it's essentially a combination. I mentioned we have looked at a number of scenarios, some of those scenarios are more based on loss of market share at those retailers, and some are a combination of price changes or changes in the retailer commission structure at those retailers, in addition to some loss of share to those new competitors. We do look at all of those factors as we build our forecast.

To be clear, for about six months or so we have been testing and I think I talked about this at the last conference call, we been testing a zero price card at Walgreens, Rite Aid, and maybe some other chains. And we're going to continue to test those, and these things have been in process now for some time, because we do want to find the sweet spot of pricing that incurs us the most acquisition and retention. But to be fair, we've been doing that, and would do that without regard to what happened at that one convenience store. That's something that we view as a weapon in our arsenal to keep our Company a top choice for consumers.

The challenge with pricing is that in this category, back to your other question about the CFPB and everything else, the total challenge is that you have the headline price, the price on the package that the consumer may see. A consumer, depending on the brand of product may not fully understand what the ongoing usage price is on the back of the package, or what might I pay per month or what might I pay for an out of network ATM. And Green Dot prices their products to be the cheapest, we typically get recognition therein in terms of how you use the product. But the headline price is something that we know consumers are susceptible to and that's why we've been experimenting with different kinds of fee policies at retail.

Okay. Last one for me, on the new checking account product, can you give us any sense of the -- any kind of more color around the revenue model or the fee structure of that? Where do you guys make money there? Is it when consumers load money on or how does that work?

Probably pretty premature to talk about pricing, but there's only so many ways to make money off any transactional account. And so the way we make money probably would be much different than the way other banks make money off of it, except that our intent is always to be much less expensive, and much more efficient, and never have any kind of overdraft or penalty fees of any kind, ever. So any product we have always has that customer covenant as part of its design. But when it rolls out, and we're ready to talk about it more publicly we will, but certainly, it's fair to say that it will be at the lowest end of the market.

All right, thanks for taking my questions.

Glenn Fodor, Morgan Stanley.

Hi, good evening. Just a high-level question. The story of the IPO and since then, over your Company and the whole crux of it was the benefit of your business model, and this commission structure, and exclusive contracts with retailers, and they want to partner with you, and just you because you build up this base of customers. And it's like an annuity stream, because they are going to sharing in the whole revenue model with you, and that seemed to be the case for a while. And now, that seems -- are you worried that that entire -- the entire foundation of your business is possibly breaking down?

No. That statement was true in July of 2010, and it's true to this day as we have this call. We're talking about things that might happen in the future, but here's the challenge that we face as an organization that needs to respond to the conditions. If you have large companies offering millions of millions of dollars to get on the rack with a product, I have a couple of choices. I can keep paying higher fees, we can keep trying to some way artificially block that, or we can say look, let's do the research on the product, let's see what our sell through would be, let's see what the optimum pricing is, and then compete in the marketplace and let that settle out and move onto the next thing. And that's what we have opted to do because while we are still exclusive with some retailers, in fact, new exclusive contracts with people like Rite Aid and K-Mart, and so forth, or some of the deals we talked about today, it's not clear to me that it's wise to offer all kinds of money in an effort to block somebody from seeing if they have a customer base. If I am the retailer and I have a company coming in and saying, look, sell my product and give it a whirl, and I'll pay you some millions of dollars to do, if I'm that retailer, I may say yes too.

It to me feels like a natural evolution and as we walk through or as you walk through a drugstore or a grocery store or a mass outlook, I don't think there's any product category, from cereals to hairbrushes, that has only one brand on the shelf for a decade, or in our case 12 years. No, I don't think it's a crumbling of anything. I think what it is is the evolution of an industry where a lot of big players like AMEX and others believe there's a lot of fruit to be had on the tree, and are going to throw their hat in the ring and see if they can be successful at it. Some will, some won't and only time will tell. We believe we will be a survivor based on what our sales are at the retailer that has added all these products, and based on our consumer research on our brand, but it is different. And I think that is the biggest thing, and maybe I am too risk-averse and if I wasn't as risk-averse this conference call may be going entirely differently where we wouldn't be guiding anything. But our feeling was, hey, we have this knowledge, we don't know what's going to happen. I can't say with certainty, so we take a risk sensitivity model and dial it back and assume that all bad happens and no good happens, what could it look like. And that's what we're tried to guide for and it may well be that things turn out better, but in the lack of precision and knowledge, some risk aversion is not necessarily a bad thing and that is our view.

Okay, that was great color, thank you. On the new procedures for boarding accounts, I'm just struggling with your explanation, I think it was Ramsey's question, it didn't seem like your business was having an issue with fraud, so your business was growing fine, fraud obviously is a part of it. It just always is in this industry, but it was manageable. And you don't want any, but it was manageable, so it seems like you are fixing something with a hammer that possibly wasn't all that much of a problem. Unless there was something behind this that we are not seeing.

For one thing, I wouldn't say fraud because there's very little financial fraud ever, even in the tax programs. It's more reputational damage than anything else.

Okay.

And it's also the fact that as the Company gets bigger, and the industry gets bigger, it not only grows at customers but it grows with crooks. And any bank, I don't care if you're us or Chase or anybody else. You have a whole rack of electronics and monitoring gear that's designed to find unusual activity and things that don't add up, and it's just our concern that we see data breaches happen, and by the way, to be clear, there's no regulator who tell you to do this. It's something the bank decides to do based on its own beliefs about how to protect its business. And so I want to be clear this is self-inflicted. But still the right thing to do.

As a Company gets bigger and you see that you can steal anybody's name and Social Security number off the internet, from any number of data breaches, it doesn't make me feel good as CEO of a bank holding company, that every person who passes an Equifax screen is who they say they are, because I may have your name and Social Security number. That means you have to look further by aggregating back into IP addresses, and computer addresses, and all kinds of usage behavior, and the time of day that you are activating the card, there's 50 different things that go into it. It may well be that the systems are dialed up a bit high and we may in fact dial them up the other way if we find out that we are being overly conservative. But that's what happened in Q1 and Q2, and keep in mind, these systems are fairly new, we just started implementing these in Q2. I'm not saying it'll always be as severe as it is, and it may back up, but it is what happened, and we think we caught up some good customers, we think we caught up some customers who are looking for a way to use a card in a way that we are not intending it to be used, and so we tend to be on the more cautious side of those kinds of issues.

Thanks Steve, appreciate it.

Bob Napoli, William Blair.

Thank you. Good afternoon. The change in the guidance, the vast majority of it, doesn't it have to be from the change in risk controls because you are saying that you're expecting these retailers to start selling the card competitively, possibly by the end of the year. So you don't have anything -- there really can't be much effect in 2012 on the competitive front. So really, the vast majority, and it's a pretty big change in guidance for six months of the year after two decent quarters. To have that big of a shift. So the down shift in activated cards has to be primarily due to the change in risk controls. Is that not correct?

Well --

-- you change those?

Well, we know that there are two retailers that will be non exclusive starting in October, let's call it Q4, but you're right, nothing happened necessarily prior to that that we are aware of. The risk controls are part of it. And the tax, the year-over-year tax comparisons extended into Q3 as well. So, John maybe can dive deeper into some of the assumptions.

That's right. And as we mentioned before, we have taken a pretty severe view of the impact of those retailers going non exclusive. Even though it's a fairly small portion of the year, we assumed a pretty dramatic hit just to get a good handle on a conservative view of what the impact could be. So it is both, it is the risk policies and it's also the competitive product.

Are one of those two retailers Walmart, and is American Express expanding or not expanding? Do you see them every day, you are monitoring your competitive environment?

We are, and we would never of course as you can imagine, Bob, although I appreciate it question, even if we had precise knowledge which we don't, we wouldn't comment on anything Walmart is doing with any vendor, whether its AMEX or MoneyGram or anyone else. Probably a better question for the companies involved. But we think that generally speaking, we need to be prepared for all kinds of competitive activity. Whether it's chasing a retail branch, even though they're not in a store, in other words, when I say retail branch in banking, I mean a branch. Even if they are not in the retail store, all these things affect everything, and because we just don't know, for us to pretend that we will just be fine because we're optimistic people, just feels imprudent. If your point is, are we guiding down too dramatically or too drastically? Don't know. Time will tell I guess, but we did want to take the most conservative cut.

Thank you.

Ashwin Shirvaikar, Citibank.

Hi, thanks. I just wanted to start with asking, what is going on with Walmart? Looks like they had a very sizable deceleration quarter-over-quarter. And is that fall into one of the two buckets, the risk controls, or the high level of competition? Perhaps related to the prior question there. If you could provide some color given the negative period of the decline.

Sure. Yes, there was no -- you are right, there is no competing product in the shelf at Walmart at all, so there would be no impact. I do think that our fraud systems and our new security protocols maybe impacted Walmart more than others because Walmart is such a big retailer. Every time you have so many millions of people coursing through the veins of the store and buying our products, we sell so many products there, that an adjustment and a new way of activation or a new kind of control will always impact a large retailer more so than a smaller retailer. I do think that they were more impacted than our other stores. There were also some things we used to do differently with those cards that we didn't do in other retailers as well. And maybe one of the reasons the growth in Walmart was weaker than normally it has been, but the growth of the Green Dot brand actually stayed very strong. And had one of its better year-over-year comparison in some time. I forget what the number was, was it 30%?

Yes, if you back out the TurboTax and the Walmart revenue, the Green Dot brand grew a little over 30% year-over-year in terms of revenue.

We think that the impact of some of these new risk controls disproportionately affected Walmart, not because Walmart is doing anything wrong, just by the nature of the size of the retailer.

Got it. Just going back to the risk controls then, are these changes that you now have to make because you are a bank and there are different know your customer requirements versus what you didn't have before and what some of your competitors might not have even now?

I think we're doing it because we think it is smart. We may be more responsive and more thoughtful about it because as the bank holding company, we have to have a formal risk enterprise function, and a formal internal audit function. It's fair to say that our governance and the way we conduct our Company is somewhat more conservative and more formalized than maybe a third-party marketer would have. But the legal obligation, whether it's Green Dot or NetSpend, or Western Union, or anybody is identical. To your point, how well you execute it and what your view is of how to run those programs are dependent upon the issuing bank and the program manager. And the level of issues they may have. So it really does vary, but the law would apply equally to everybody because all these products are issued by banks, so the bank regulator when not single Green Dot out versus Bancorp or somebody else. It's all the same laws that we're all required to follow.

Tien-Tsin Huang, JPMorgan.

Hi, thanks. I just wanted to ask what changed to trigger the guidance cut? We've been -- Steve and John, you guys have been hearing these competition concerns for quite some time from investors, and on the risk side I thought that was appreciated given your pursuit of the bank. I know Ashwin just asked that, just trying to understand what changed. Is it really just the conversation with the retailers or is this capitulation and just resetting of expectations. I'm just dying to understand the timing of why this is happening now versus earlier.

I think, Tien-Tsin, I think all of that. We have always addressed, if you look at transcripts of previous calls or public conferences, that we believe competition is coming, that no company in any growing industry stays exclusive forever. There's literally not an example of that anywhere. Even iPods are non exclusive at Best Buy, everybody has competition. And so we've never felt we'd maintain exclusivity forever. We've always acknowledged that point.

I think what caused the timing of it was that, as you know, we reordered or reorganize our revenue division beginning in January, and we've had some pretty great success with that actually. And we are really cooking much better than we were and that's all good stuff. But part of that reorganization is, I said, hey, guys I want to personally meet with every buyer, I want to personally do what I did a decade ago, and that is touched the retailers directly for these regular ongoing sales meetings. Normally, I'd be trotted out for quarterly reviews or something else, but I really said, I want to play salesman and talk to the retailers directly. And the flavor that I got was in part what influenced my thinking on this, that if I were the retailer, and I had many companies coming to me, paying me millions of dollars to have access to shelf space, what would I say. And my answer in my own little mental role play was, I would do it.

And I think if you think back to a year or two ago these contracts, which had at that time, two or three years left to go, our retailers were telling us they weren't interested in non exclusivity and I think that was the case. But a number of them are still telling us they're interested in exclusivity and want to continue that, so this is all not a fait accompli, but I did get the feeling and I came back and I said, hey, John, we should talk about this. Because odds are better than not that not every retailer necessarily, but two or three big ones could have a PayPal -- the PayPal card or they could have the AMEX card or they may have these others. And what could that do to our sales if that were to happen. And then we looked at some case studies that were rolling out as these things were being discussed.

I think it's all that. Could we have waited a quarter or two or three more to provide this information? Possibly, but our fear was that by that time it could have been too late because we believe at least one retailer will be out there in October and so we just want to give the early color, so I think kind of all of that. We want to moderate expectations. We want to let people know that this is a risk that could be coming. And we want to be up front and blunt about it. Hopefully, not overtly blunt but that's all part of it.

The other thing I would probably add to that, as we mentioned when we first provided guidance that we didn't need significant new programs to get to the low end of the range. To get the high end of the range we would need some significant new announcements. We have a significant announcement now with our education channel product, but it really won't have an impact until 2013. Earlier in the year, I would've expected that we'd have a significant new announcement that could actually impact 2012, so the timing of that, the impact of that new announcement has changed as well.

Understood. Okay, that's good. And I guess as my follow-up, just another high-level strategic question for you Steve, the mobile checking account product, we have heard you talk about that in a lot of different settings. It sounds obviously very exciting, but the more I've been thinking about it, is that an offensive move, or a defensive move? Meaning, do you feel like you need to transition into that to move off of your traditional GPR prepaid? I'm just trying to understand sort of the thinking of that transition and what it means for your legacy, for your traditional --

I do follow you. It is offensive, and it is something that as you know we've been planning now for two years. Nothing that has come out of the woodwork recently.

Right.

But it's a completely new product, and the IT and the engineering for it is completely from scratch. It doesn't use many of the same components that our prepaid card does, so it has been a long-term project and I think it, as you know, as one of the drivers, we bought Loopt earlier this year and some others to kind of beef up our technology and our mobile technology. I think it's offensive. There's a lot of customers out there that we believe like prepaid but a lot of others in our households under $75,000 a year market segment that would think of themselves as more of checking account customers as opposed to a prepaid customers. And so we think it's an important product and one that could yield opportunity for us. I would say its more about expanding our products to new customer segments within our target demographic and that's what it's always been about, and still is.

Great, thanks for taking my question.

You bet.

Greg Smith, Sterne Agee.

Hi guys. On the competitive front, are you seeing any of the banks that have come out with the GPR card looking for retail distribution? Or is it just the same cast of characters, Western Union, NetSpend? Can you delineate there a little bit?

Yes, to use your phrase, it would be the same cast of characters. The Chase product is very new and the benefit to the Chase product from the way I described it is, it is in their branch and uses their branch infrastructure, so they've moved that benefit and pricing scale, by going out. But you never know I suppose. We have not seen Chase or US Bank or Regions or any of the number of banks that are doing this in retail. But certainly we see PayPal, which is a process by NetSpend, in our retailers, or potentially coming to retailers, 7-11 today for example, and maybe elsewhere. Western Union also at 7-11, it's hard to tell. Black Hawk, there are already three or four products, I guess, and we were one of the late comers there. And so we do pretty well, but we were -- the majority have other products before they stop there, so I don't have any good research for you there, but I'd say the same cast of characters, as you mentioned.

Okay, and then looking at Walmart specifically, you obviously have the tighter controls, which is probably impacting your forecast at Walmart but are you making other -- it sounded like you're making assumptions that Walmart may even test other competitive products. Did I hear that right, or what are your assumptions for Walmart through the terms of your contract?

No, I never, to be clear, I never said anything about that. Walmart has a fabulously run financial services division that we work with. And they represent lots of products and lots of companies, MoneyGram and Check Free and our products and GE credit cards and all kinds of financial service providers. So they each have their own business to run and we respect that and so I've not made any comment about what Walmart may or may not do. We have no direct expectation.

All we're saying is just globally, as you think about market altogether, if someone were to say to me, hey, is there more competition in the future or less, the answer is more. Will they all be on every retail shelf you have? Impossible to say. Some maybe here others not there and what not. We need to say how it plays out. Gosh, as you look forward in the next year, what should the most conservative investor be prepared for and the answer is this re-guidance, this reforecast. I think that's the way we are looking at it. It may turn out to be much better. Unlikely to be much worse, but we just don't know, and so uncertainty breeds conservatism and that's what we're trying to signal.

Okay, and then Steve, can you provide a little more color on the RushCard deal? Seems like that could've potentially been an acquisition. Why sort of the distribution deal there? Why did that make most sense?

Because it allows us to see how the product does in retail. We believe it will do well. It allows us to form a good solid joint partnership together and see how the venture does. I suppose that there's always time to discuss acquisitions, if that ever came to pass, and we can figure that out down the road. But we think the brand has a lot of appeal, we think it's expansive to the Green Dot category. And we can offer a lot of synergies and opportunities for the RushCard business, the UniRush Company, and in exchange we have an opportunity to market a product that we think has targeted appeal. I think it's a win/win for both of us, and I think we both are able to get the fruit, if you will, without either one of us having to buy or sell the tree and the made sense for right now.

John Kraft, DA Davidson.

Hi guys. I have a question about the new regulatory risk controls, and I guess really on just a logistical basis, the process by which a customer might see that change. You will still see the retailers selling the card for the activation fee, and the initial load, right? And then when they come home and try to set it up or activate it officially, that's when they will be declined on your automated system?

Yes. To be fair, that's how it's been for 12 years. And that's the way it would have to be for any company out there doing what we do today. So, you are right, that's the process. Nothing novel about that. And we've always, by the way, had a fairly high rejection rate for cards that match our customer identification processes. We just ratcheted up a few notches, and that's what you are seeing here, but it isn't like we had no controls before and now we do. I want to be clear about that, but it's always been a regulated business, it's always been a bank issued business, and we've always been obligated to follow all the various laws and regulations surrounding risk parameters. I think what we are seeing here is that it wasn't just ID verification, it's also just how people use the card and trying to spot usage that later could come back to show that it was used improperly, or used for something that we don't want it used for. It's a combination of many systems and controls.

Right. Just to be clear, those declined customers would still have a single use card, going forward. Just as they would have before.

Yes, they're offered -- our policy has always been they're offered a refund check or they can spend down on the reloadable temporary card in the package, and that has not changed.

Would that increase in declines essentially show up as churn? Are those customers treated -- counted in the active card account?

No, if they don't successfully pass the activation process then we don't count them as an activation.

Okay.

And the spend that they do on that card is really not very material, as those initial loads are pretty small compared to all the ongoing loads from our active customers.

Got you, okay. And then just one clarification on the RushCard. Your new partnership is specific with the retail launch of that card, not across the board of all the new RushCards, correct?

Yes that's right. Although we had a partnership with them prior to this where we reload all of their cards, and that will continue. But this new announcement is specific to the retail channel.

Got you, okay. Thanks guys.

Thanks.

That's all the time that we have for questions today. We thank you all for attending today's conference call. At this time you may disconnect your line. Thank you, and have a great day.